Consumer prices rose 7.31 percent in June from a year
earlier, compared with 8.28 percent in May, the Statistics
Ministry in New Delhi said yesterday. That’s the slowest pace
since the index was created and compares with a 7.7 percent
median estimate in a Bloomberg News survey. The wholesale-price
index increased 5.43 percent after a 6.01 percent gain in May,
the Commerce Ministry separately reported yesterday.

Rajan signaled last month he’d ease monetary policy if
consumer-price inflation was on pace to fall below 8 percent in
January 2015, a glide path he adopted earlier this year. Finance
Minister Arun Jaitley this month kept a target to lower the
budget deficit to a seven-year low as a weak monsoon and rising
fuel prices threaten to boost spending on subsidies.

“Both headline numbers have surpassed expectations, but
the Reserve Bank of India has said they are focused on
sequential momentum before taking any action on monetary
policy,” said Rupa Rege-Nitsure, chief economist at Bank of
Baroda in Mumbai. “The RBI will undertake an assessment of the
monsoon in September, but even then I don’t expect any decisions
on interest rates this calendar year.”

Jaitley Call

The economy is on course for below-8 percent inflation this
year, Rajan said on July 10. He kept interest rates unchanged
last month, saying risks to the central bank’s forecast of 8
percent consumer inflation by January 2015 are “broadly
balanced.” The next policy review is due Aug. 5.

In an interview with the Times of India newspaper published
today, Jaitley said interest rates are the RBI’s responsibility
and should fall “once inflation starts moderating a little.”
He added that Modi opposes higher taxes as a way of bolstering
India’s finances.

“The ’bitter pill’ will not be in the shape of higher
taxation,” Jaitley told Times of India. “It could mean that
for utilities, the user will have to pay for what they use.
Unless users pay, utilities can’t survive.”

In its first budget announced July 10, Prime Minister
Narendra Modi’s government made curbing inflation one of its top
priorities and retained the previous government’s fiscal deficit
target of 4.1 percent of gross domestic product in the year
through March 2015. Jaitley left revenue and expenditure targets
largely similar to an interim budget in February.

Modi Budget

Modi’s government also said it would consult with the
Reserve Bank of India on developing a “modern monetary
framework.” Such a structure must include a CPI target and
operational autonomy for the central bank, the finance ministry
said in a July 9 report.

The rupee weakened 0.1 percent to 60.1225 per dollar as of
2:29 p.m. in Mumbai, while the benchmark stock index rose 0.6
percent and the yield on the 10-year sovereign bond fell to 8.75
percent from 8.78 percent.

Industrial production gained the most in 19 months in May,
rising 4.7 percent from a year earlier compared with 3.4 percent
the previous month, government data showed July 11.

Food prices rose 7.9 percent in the CPI basket in June from
a year earlier, while fuel and energy costs accelerated 4.58
percent, yesterday’s data showed. India’s monsoon rainfall has
been 41 percent below normal since June 1, the weather
department said yesterday.

The threat of a “full fledged drought” will keep Rajan
from lowering rates in 2014, economists at Bank of America
Merrill Lynch, including Indranil Sen Gupta in Mumbai, wrote in
a report yesterday. The lender, which earlier predicted an
interest rate cut in December, said the government will continue
to boost food supply and enforce measures to stop hoarding.

“It’s a matter of concern but until July is over we must
keep our fingers crossed,” Jaitley said, referring to the risk
of a drought. “Governments always have contingency plans.”